This article on labour law compliances for start-ups in India is written by Meet Kachhy, pursuing M.A. in business law from NUJS, Kolkata.
Over the past decade, India has seen a healthy and vibrant start-up scene come up. This has been dominated by a slew of new age businesses, often set up by young entrepreneurs. While the ideas, and often the promoters, might be new age, all businesses in India have to comply with a wide variety of labour laws dealing with compensation, working conditions, medical benefits, discrimination and retirement benefits.
One of the challenges facing any entrepreneur or organization is that while the economy and the working culture in many places have progressed with times, the rules governing employment, benefits and terminations have often been drafted anywhere between 50 to 150 years back. While most of these laws & acts have undergone amendments to make current certain key provisions, there still does not exist a labour law framework which is suitable for the times we live in.
Young Indians today have the conviction to venture out on their own and a conducive ecosystem lets them watch their ideas come to life. In today’s environment, we have more startups and entrepreneurs than ever before and the movement is at the cusp of a revolution. However, many startups do not reach their full potential due to limited guidance and access.
In this document, we lay out certain key provisions and applicability criteria of the various labour laws applicable in India. This document is not to be taken as a comprehensive guide on the subject, rather more like a guiding document which could point you to the various aspects to be complied with. Each organization must eventually go through the provisions of each Act and decide for itself what applies to it, and what doesn’t.
Recent developments in the compliance framework for start-ups
The government of India, in its drive to encourage start-ups in the country, has come out with a policy on labour law compliances for start-ups. The key points from the same are surmised below:
- A start-up is defined as follows, for the purposes of these exemptions:
a) An entity incorporated or registered in India not prior to five years, and with annual turnover not exceeding Rs Twenty Five Crores in any preceding financial year
b) Working towards innovation, development, deployment or commercialization of new products, processes or services, driven by technology or intellectual property
c) Provided that such business is not formed by splitting up, or reconstruction, of a business already in existence
d) Provided also that an entity will cease to be a start-up if its turnover for the previous financial years has exceed Rs. Twenty Five Crores or it has completed 5 years from the date of incorporation or registration
2. Startups shall be allowed to self-certify compliance (through the Startup mobile app) with nine labour and environment laws
3. In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.
4. In case of environment laws, Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.
5. Labour laws from which exemption is provided under the current scheme:
a) The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996
b) The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979
c) The Payment of Gratuity Act, 1972
d) The Contract Labour (Regulation and Abolition) Act, 1970
e) The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
f) The Employees’ State Insurance Act, 1948
6. Environmental laws from which exemption is provided under current scheme:
a) The Water (Prevention & Control of Pollution) Act, 1974
b) The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003
c) The Air (Prevention & Control of Pollution) Act, 1981
Factories Act, 1948 (Amended 1987, 2016)
- Applicable only to a factory, as defined under the Factories Act, 1948
a) as any premises where 10 or more people are working or were working on any day in the preceding 12 months, and in any part of which a manufacturing process was carried out with the aid of power, or
b) as any premises where 20 or more people are working or were working on any day in the preceding 12 months, and in any part of which a manufacturing process was carried out without the aid of power, or
c) Manufacturing process is defined as:
i) making, altering, repairing, ornamenting, finishing, packing, oiling, washing, cleaning, breaking up, demolishing or otherwise treating or adopting any article or substance with a view to its use, sale, transport, delivery or disposal; or
ii) pumping oil, water, sewage, or any other substance; or
iii) generating, transforming or transmitting power; or
iv) composing types for printing, printing by letter press, lithography, photogravure or other similar process or book-binding; or
v) constructing, reconstructing,, repairing, refitting, finishing or breaking up ships or vessels; or
vi) preserving or storing any article in cold storage
2. The factories act governs the following aspects with respect to any establishment covered under the definition of a factory as defined above:
a) Working hours, breaks between work, maximum hours per week/per shift
b) Annual leave with wages
c) Employment of young adults
d) Provisions relating to hazardous processes
Industrial Employment (Standing Orders) Act, 1946
- The Industrial Employment (Standing Orders) Act 1946 requires employers in industrial establishments to define with sufficient precision the conditions of employment under them and to make the said conditions known to the workmen employed by them.
a) It applies to every industrial establishment wherein one hundred or more workmen are employed or were employed on any day in the preceding 12 months
2. The Software & IT industry in India had been exempt from complying with this act for 11 years before the government withdrew the exemption in 2012. Now, all Software & IT companies which have more than 100 employees, fall under the ambit of this act
3. An industrial establishment is defined as follows:
a) An industrial establishment as defined in clause (ii) of section 2 of the Payment of Wages Act 1936
b) a factory defined in clause (m) of section 2 of the Factories Act 1948 (See above)
c) a railway as defined in clause (4) of section 2 of Indian Railway Act 1890
d) the establishment of a person who, for the purpose of fulfilling a contract with the owner of any industrial establishment, employs workmen
4. The various matters to be provided in the standing orders issued under this act include:
a) Classification of workmen, e.g. permanent, temporary, apprentices, etc
b) Manner of intimating to workmen periods and hours of work, holidays, pay-days and wage rates
c) Shift working
d) Attendance & late coming
e) Conditions of, procedure in applying for, and the authority which may grant leave and holidays
f) Requirement to enter premises by certain gates, and liability to search
g) Closing & reporting of sections of the industrial establishment, temporary stoppages of work and the rights & liabilities of the employer and workmen arising therefrom
h) Termination of employment, and notice thereof to be given by employer and workmen
i) Suspension or dismissal for misconduct, acts or omissions which constitute misconduct
j) Means of redress for workmen against unfair treatment or wrongful exactions by the employer or his agents or servants
k) Any other matter which may be prescribed
Termination of employment
- Termination of employment in India is governed by the standing orders issued under IESA, 1946. Any dispute arising out of the termination of service is covered under the Industrial Disputes Act
- Termination of employment can happen under two circumstances:
a) Not at the Employer’s behest: Mutual agreement, Resignation of the employee, employee’s retirement, expiry of contract
b) At the employer’s behest: dismissal for misconduct, discharge and retrenchment
3. Termination by Employer
a) Misconduct is defined as willful insubordination, disobedience, theft, fraud, dishonesty, wilful damage or loss of employer’s property, bribery, habitual lateness or absence, and striking unlawfully
b) Retrenchment corresponds to termination by employer on economic grounds
c) Discharge is termination for reason other than misconduct or retrenchment
d) Termination by employer is unlawful if it is due to trade union activity, filing complaints against the employer, discrimination of any kinds or in violation of any fair labour practices.
4. Process of termination
a) For employees being terminated under the charge of misconduct, the employer has to provide a written complaint against the employee, followed by a fair hearing to determine the culpability of the employee.
b) If the employee is being retrenched due to economic reasons, the employer first needs to obtain approval from the relevant governmental authority to proceed with the retrenchment.
5. Any dispute arising out of termination has to be resolved in the labour court, as governed by the Industrial Disputes Act, 1947.
6. The above laws are only valid for workmen. Non-workmen staff in private sector companies are governed by their contracts and general terms of service.
Payment of Wages Act, 1936
- The maximum wage-period may not exceed one month
- Wages should be paid within
a) 7 days of end of the month if the industrial establishment employs less than 1000 people
b) 10 days of end of the month otherwise
c) Each employer shall maintain registers, recording the following information about each employee:
3. Work performed by them
a) Wages paid by them
b) Deductions made from their wages
c) Receipts given by them
d) Each such register/record has to be preserved for a minimum of 3 years after the date of last entry
The Contract Labour (Regulation & Abolition) Act, 1970
- This act is to regulate the employment of contract labour in certain establishments and to provide for its abolition in certain circumstances
- It is applicable to:
a) Every establishment in which twenty or more workmen are employed or were employed as contract labour on any day in the preceding 12 months
b) Every contractor who employees or employed twenty or more workmen on any day in the preceding 12 months
3. The act doesn’t apply to establishments in which work only of an intermittent or casual nature is performed:
a) If work is performed for more than 120 days in the preceding 12 months, then it is not classified as intermittent
b) If work is of a seasonal nature and is performed for more than 60 days in the preceding 12 months, then it is not classified as intermittent
4. In the context of this act, establishment means any place where an industry, trade, business, manufacture or occupation is carried out.
5. Every principal employer of an establishment to which this Act applies shall, within the appropriate period, apply for registration with the registering officer. Once the registration has expired or been cancelled, the establishment cannot employ contract labour.
6. The principal employer is responsible for adequately providing the following to the contract labour:
b) Rest rooms & washing facilities
c) First aid facilities
d) Timely and complete payment of wages
Employees’ State Insurance Act, 1948
- This act is to provide certain benefits to employees in case of sickness, maternity and employment injury, and to make provisions for certain other matter thereto
- ESI is applicable to any establishment/factory which employs 10 or more persons at any point of time
- The ESI fund is made up of contributions from employer and employee, which are governed as per the following rules:
a) Only to be done for employees whose monthly wages are Rs 15,000 or lesser
b) Employer’s contribution is 4.75% of the total wages, and employees’ contribution is 1.75% of the total wages
c) If the wages of an employee are less than Rs 100 per day, he/she is exempted from making employee contributions, but the employer has to continue making contributions
4. Detailed list of benefits covered under the ESI Act can be found at: http://esic.nic.in/page.php?pid=NzU=
Payment of Bonus Act, 1965
- This act is to provide for payment of bonus to persons employed in certain establishments on the basis of profits, production or productivity
- It is applicable to every factory or establishment where 20 or more people are employed
- The minimum bonus payable to an employee is subject to following conditions:
a) The employee has worked for not less than 30 days during the accounting year
b) Draws a monthly salary of Rs 21,000 or lesser
c) Minimum bonus of 8.33% of annual wages has to be paid, regardless of whether the establishment has made a profit or not
d) Bonus to be calculated at a monthly wage of Rs 7,000 or the applicable minimum wage, whichever is higher
e) If the establishment makes a profit, then the surplus is to be distributed in proportion with the wages, subject to a maximum of 20% to be paid out as bonus
f) To be paid within 8 months from the close of the accounting year
The Minimum Wages Act, 1948
- Minimum wages can be set by centre as well as states
- The act is legally non-binding, but statutory. Employing workforce below minimum wages amounts to forced labour, and is a statutory non-compliance
- There is no single uniform minimum wage rate across India, as it varies across the country.
- Any start-up must check the applicable local minimum wage rate
The Maternity Benefits Act, 1961
- This act governs the maternity benefits due to female employees, employed in establishments which employ 10 people or more, and are not covered under the ESI Act
- If the establishment is covered under ESI Act, but the wages of the employee make her ineligible for coverage under ESI Act, then this act will apply to such female employees too
- Every woman shall be entitled to, and her employer liable for, payment of maternity benefit at the rate of her daily average wages for a period not exceeding 12 weeks
- Of the above 12 weeks, a maximum of six weeks can be taken prior to delivery
- To qualify for this benefit, a woman must have worked (as an employee or contractor) for a minimum of 80 days in the preceding 12 months
- No employer can knowingly employ a woman during a period of 6 weeks from her delivery
Payment of Gratuity Act
- Gratuity is a payment to be made to an employee upon the termination of her service, provided she has had a continuous service of 5 years or more
- The employer has to pay gratuity at the rate of 15 days per year of service of the last drawn salary, with the years of service rounded down to the nearest whole number
- Gratuity is payable within 30 days of the last date of employment
- As a prudent financial practice, establishments are supposed to provide for gratuity benefits on their balance sheets, at end of each financial year
The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
- This act provides for prevention of sexual harassment against female employees at the workplace
- The Sexual Harassment Act stipulates that a woman shall not be subjected to sexual harassment at any workplace. As per the statute, presence or occurrence of circumstances of implied or explicit promise of preferential treatment in employment; threat of detrimental treatment in employment; threat about present or future employment; interference with work or creating an intimidating or offensive or hostile work environment; or humiliating treatment likely to affect the lady employee’s health or safety may amount to sexual harassment.
- The ambit of the Sexual Harassment Act is very wide and is applicable to the organized sector as well as the unorganized sector. In view of the wide definition of ‘workplace’, the statute, inter alia, applies to government bodies, private and public sector organisations, non-governmental organizations, organizations carrying on commercial, vocational, educational, entertainment, industrial, financial activities, hospitals and nursing homes, educational institutes, sports institutions and stadiums used for training individuals.
- As per the Sexual Harassment Act, a workplace also covers within its scope places visited by employees during the course of employment or for reasons arising out of employment – including transportation provided by the employer for the purpose of commuting to and from the place of employment
- The definition of ’employee’ under the Sexual Harassment Act is fairly wide and covers regular, temporary, ad hoc employees, individuals engaged on daily wage basis, either directly or through an agent, contract labour, co-workers, probationers, trainees, and apprentices, with or without the knowledge of the principal employer, whether for remuneration or not, working on a voluntary basis or otherwise, whether the terms of employment are express or implied.
- The Act requires an employer to set up an ‘Internal Complaints Committee’ (“ICC”) at each office or branch, of an organization employing at least 10 employees. The government is in turn required to set up a ‘Local Complaints Committees’ (“LCC”) at the district level to investigate complaints regarding sexual harassment from establishments where the ICC has not been constituted on account of the establishment having less than 10 employees or if the complaint is against the employer. The Sexual Harassment Act also sets out the constitution of the committees, process to be followed for making a complaint and inquiring into the complaint in a time bound manner.
- The Sexual Harassment Act empowers the ICC and the LCC to recommend to the employer, at the request of the aggrieved employee, interim measures such as (i) transfer of the aggrieved woman or the respondent to any other workplace; or (ii) granting leave to the aggrieved woman up to a period of 3 months in addition to her regular statutory/ contractual leave entitlement.
- The law allows female employees to request for conciliation in order to settle the matter although a monetary settlement should not be made as a basis of conciliation.
- If an employer fails to constitute an Internal Complaints Committee or does not comply with any provisions contained therein, the Sexual Harassment Act prescribes a monetary penalty of up to INR 50,000 (approx. US$1,000). A repetition of the same offence could result in the punishment being doubled and/or de-registration of the entity or revocation of any statutory business licenses.
Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
- This act provides for the compulsory contribution towards a fund for the future of an employee after his retirement
- EPF contributions are to be done on a matching principle, with the employee contributing 12% of the basic plus dearness allowance towards the EPF account, matched by the employer making the same contribution
- EPF contributions are mandatory for employees drawing less than Rs 15,000 per month
The Weekly Holiday’s Act 1942
- This act applies only to shops, restaurants or theatres
- Every employee employed otherwise than in a confidential capacity or in a position of management in any shop, restaurant or theatre shall be allowed in each week a holiday of one whole day
- Bare acts for each of the act referenced in this document